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Opinion

Uncommon opportunity

Lucrative rare-earth metal mining investment demystified

Hey there, time traveller!
This article was published 3/6/2011 (2996 days ago), so information in it may no longer be current.

You may not have heard of rare-earth metals, but you're likely familiar with the technologies they make possible. Without them, your BlackBerry, iPhone, car, computer and just about any electronic gadget would not exist as they do today.

But their uses don't stop there. Rare-earth metals are also essential in manufacturing components for green technologies, such as wind power, and for the military, they are used in radar- and missile-guidance systems.

Demand for these materials is growing fast, so much so that they could be the next "it" commodity that gets investors hot and bothered.

So just what are these materials? They are those obscure elements on the periodic table that you may not remember from high school chemistry class, such as cerium, praseodymium, dysprosium and terbium.

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Hey there, time traveller!
This article was published 3/6/2011 (2996 days ago), so information in it may no longer be current.

Rare earth to be exported is seen at the Port of Lianyungang in Lianyungang city, east Chinas Jiangsu province, 5 September 2009. Flatscreen TVs, laptops and Apple's iPhones all use rare earth metals, critical to tech devices but largely controlled and produced by China. It's a market that a number of Canadian companies are trying to enter with their own mining properties in order to compete with and potentially take away market dominance from China.

THE CANADIAN PRESS/AP-IMAGINECHINA

Rare earth to be exported is seen at the Port of Lianyungang in Lianyungang city, east Chinas Jiangsu province, 5 September 2009. Flatscreen TVs, laptops and Apple's iPhones all use rare earth metals, critical to tech devices but largely controlled and produced by China. It's a market that a number of Canadian companies are trying to enter with their own mining properties in order to compete with and potentially take away market dominance from China.

You may not have heard of rare-earth metals, but you're likely familiar with the technologies they make possible. Without them, your BlackBerry, iPhone, car, computer and just about any electronic gadget would not exist as they do today.

But their uses don't stop there. Rare-earth metals are also essential in manufacturing components for green technologies, such as wind power, and for the military, they are used in radar- and missile-guidance systems.

Demand for these materials is growing fast, so much so that they could be the next "it" commodity that gets investors hot and bothered.

So just what are these materials? They are those obscure elements on the periodic table that you may not remember from high school chemistry class, such as cerium, praseodymium, dysprosium and terbium.

Savvy investors, however, have been familiarizing themselves with these little-known elements for some time now, speculating that firms involved in mining and processing rare-earth metals will experience tremendous growth in the coming decade.

 

If this has piqued your interest and you're hungry for more, you're in luck. Next Saturday morning at the Winnipeg Free Press News Café in the Exchange District, one of the world's foremost experts on rare-earth metals is giving a free lecture.

Jack Lifton is the principal founder of Illinois-based Technology Metals Research. A chemist by training, specializing in high-temperature metallurgy, he has more than 40 years of experience in the sector and is frequently consulted by many of the world's largest technology, automotive, mining and defence corporations.

The Free Press News Café presentation, entitled Rare Earth Metals: Fad or Phenomenon? is a great chance for anyone considering investing in the sector to hear Lifton's insights about why rare-earth metals have the potential to be one of the most lucrative investments in the next decade, says Joseph Alkana, an investment adviser with Union Securities, a sponsor of the event.

"He was introduced at an event I went to a few weeks ago in Toronto as 'The Wayne Gretzky of the rare-earth world,'" Alkana says. "One of the quotes I heard him use is he's already forgotten more than some other experts even know about this sector."

In a recent interview with the Free Press, Lifton discussed why the sector holds so much promise.

One of the first points to understand, he says, is rare earths are not as rare as their name suggests. Hundreds of deposits have been found around the world and about half of them are located in Canada.

The problem is few of these deposits are in production. And just as important, few supply chains exist for developing these commodities into alloys that can be used for high-tech components.

"Nobody is producing much outside of China," he says. "But the list of deposits around the world is over 350, and there are over 250 listed companies in the sector."

Many firms have yet to begin developing their deposits and are years away from extracting rare-earth metals from the ground. Others, however, are ahead of the game, such as Molycorp Minerals, which is expected to begin producing by the end of 2012. Like many firms in this sector, Molycorp is taking a mine-to-market approach. It is involved in each step of the supply chain, from mining to refining and producing alloy for manufacturers of technologies requiring these commodities.

 

This has led some analysts, such as those at Goldman Sachs, to forecast a mini-boom for the sector that will last until the end of 2012, the Wall Street Journal recently reported.

But Lifton is skeptical that production will occur as Goldman analysts predict. Molycorp's plan to mine, refine and produce is undiscovered territory, he says.

And it's likely the firm will encounter problems that will delay full development.

"My point is, rare-earth metals are very complicated to separate, refine and alloy," he says.

"The Goldman people don't really seem to know what they're talking about."

Not to mention, he says, their prediction is a short-term outlook, and it's the long-term picture investors should be looking at if they're going to invest a small portion of their portfolio in this sector.

Here's why.

China is the only nation that has a working supply chain for rare-earth metals production, and Lifton says China will be hard-pressed to keep up with even its own domestic demand — particularly for green-tech — over the next decade.

"If the Chinese are to build out their program of wind, there will be nothing left for the rest of the world, and believe me, the people at Siemens and General Electric are very much aware of the fact they need new supplies of rare-earth metals outside of China in order to be in the wind-turbine business," he says.

"If they don't find it, they're afraid that they're going to wind up without it."

So the race is on to develop mine-to-market supply chains in other parts of the world, and Lifton says some of the best prospects for development are in Canada.

Still, investors should expect a bumpy ride. Extracting, refining and producing alloys and manufacturing components are costly, labour-intensive and environmentally hazardous. China — with its lower cost of labour and less stringent environmental standards — had been the only nation willing and able to do all this hard, dirty work for western technology and automotive firms over the last few decades.

"It all worked out fine so long as the Chinese were docile and did what they were told," Lifton says. "All of a sudden, the Chinese owned these industries and our people said, 'What happened?' "

As a result, industries reliant on these materials are scrambling to invest in firms willing to develop the supply chains, and Canadians now find themselves presented with a rare opportunity to invest in their own backyard in a burgeoning sector.

Only a handful of firms — including Canadian companies like Avalon Rare Metals and Great Western Minerals Group — are well into the development phase, which generally takes six to eight years.

But it's the established firms that hold the most promise because the newer players — and there are many — are likely to face an uphill battle in the mine-to-market race, Lifton says. "I would say that we're already down to a cull."

As a result, investors should expect a lot of consolidation in the sector in the next few years, says Alkana at Union Securities.

They should also anticipate volatility in the share price, even in the stock prices of firms that will likely emerge as the victors in the rare-earth rush, because the road to developing rare-earth deposits is anything but straight and smooth, he says.

And it may even turn out other materials or technologies will emerge in the next few years — before supply chains are complete — that would render rare-earth metals much less valuable.

"This is a high-risk sector, and there are all sort of problems that can go wrong," Alkana says. "But that's also what leads to the higher prices, too."

giganticsmile@gmail.com

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